RMIT Classification: Trusted

1. Harry & Potter

The legal issue is whether Harry and Potter - directors of A Pty Ltd have breached:
a. Fiduciary duty to act in good faith in the best interest of the company and
corresponding statutory duty to under s181(1)(a).1
b. Fiduciary duty to act for proper purpose and corresponding statutory duty under
s181(1)(b).2
c. Fiduciary duty to avoid undisclosed conflict of interest and corresponding statutory
duty under s191(1)3 and statutory duty to use position properly under s182(1).4
d. Common Law duty of care, skill and diligence and corresponding statutory duty under
s180(1).5
When they persisted in selling the Estate of the company to a new joint venture company
based on the advice from the bank without consent of shareholders and failed to disclose the
fact that they had received an unsecured loan of $500,000 offered by the bank to the Board
that is within personal knowledge.

Good Faith
- Friday
Section 181(1)(a) states– 11:30
that directors must exercise their powers and discharge their duties in
good intention to bring benefits to the company.

Applying the legal test to determine whether Harry and Potter act sincerely for the best
interest of the company. Both directors believed that their decisions were based on the
advantages of the company since they looked at the potential gain from the property
development, which would generate higher returns than the price proposed by Mandy based
on the estimation of Randy - major property developer. Besides, they thought company A
would be profitable if it held 45% of capital from a new joint venture company. However,
evidence shows that unbeknown to the Board and members, these directors' decision was
influenced by a $500,000 unsecured loan received from the bank. As in ASIC v Adler & Ors6

1
Corporations Act 2001, section 181(1)(a)
2
Corporations Act 2001, section 181(1)(b)
3
Corporations Act 2001, section 191(1)
4
Corporations Act 2001, section 182(1)
5
Corporations Act 2001, section 180(1)
6
ASIC v Adler & Ors [2002] NSWSC 171

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case where Adler - one of the directors of HIH - used the company’ fund to purchase his
share at an inappropriate price and also lent the fund to another Adler company without
security or proper documentation being sought regardless of the attention of other HIH
directors. Then, Adler was held to contravene in good faith and for proper purposes, which is
similar to the conduct of Harry and Potter. Additionally, the case Parke v Daily News Ltd7
where the court asserted directors’ duty is to the interest of the company which is the same as
the collective interest of members when the company is solvent. In other words, directors
must prioritize the company’ benefits; consider shareholders’ approval, as well as disclose
any information that might affect the company’ interest. Compared to this case, these
directors have the intention to eliminate shareholders’ involvement in the company activities
by ignoring the voting results and claiming only the Board can run the company which is
demonstrated to benefit their interest, not the company as a whole. Hence, Harry and Potter
did not act in the way a reasonable director would believe to be in the best interest of the
company and breached s181(1)(a).

Exercise Power For Proper Purpose

Section 181(1)(b) of the Act states that directors must exercise proper purposes to push the
company’ interest before their own or other parties.

The legal test is applied to determine whether the directors had improper conduct to benefit
the external parties rather than the company. Firstly, the objective purpose of selling the
Estate which the directors’ power was granted was to gain profits from acquiring the best
price or from the property’ development activities. Nevertheless, these directors’ actual
motivation of property exchange is to receive the $500,000 unsecured loan from the bank.
There is a relevant case Bell Group v Westpac Banking Corp (No9)8 where the court held the
directors of the Bell Group - an insolvent company - exercised their powers for improper
purposes when they arranged for the group to enter into transactions that converted unsecured
debts into secured debts with its banks since the main purpose of these transactions is to keep
the banks at bay so as to ward off liquidation. It was found that this conduct caused the Bell
group to enter into agreements which were in the interests of the banks and the ultimate
parent company rather than in the interests of the Bell group and its creditors. Compared to
this case, Harry and Potter prioritizes self-interest and the desire of the bank over the interest

7
Parke v Daily News Ltd (1962) Ch 927
8
The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239

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of their company by letting the bank undervalue the Estate, then could take advantage of it to
acquire lucrative profits. In fact, as executive directors, they are well-qualified enough to
perceive that the transaction could cause the company to be abused by the third parties but
intentionally ignore it. Therefore; the directors breached s181(1)(b) for exercising improper
purpose to benefit themselves and other parties instead of the company and the whole
members.

Disclose Material Personal Interest

Section 191(1) states that a director of a company must disclose his or her material personal
interest in a matter that relates to the company’s affairs. There is little guidance on defining
the concept of ‘material personal interest’. However, there is a clarification in Grand
Enterprises Pty Ltd v Aurium Resources Ltd.9 Grand Enterprises sued Aurium Resources to
prevent its share issues to a third party, claiming that directors failed to disclose all material
personal interests. The court concluded that it would have been material only if Mr. Remta
had received benefits for achieving the deal. Meanwhile, Mr. Quinn and Mr. Benson’s
holdings were insufficient to affect their decision making. It clarifies that interest is
considered material personal if it has the capacity to influence one’s decision making. Harry
and Potter personally accepted an unsecured loan of $500,000 from the bank in exchange for
achieving the outcome in favour of the bank. They financially benefited from the Estate
selling contract, so the loan motivated them to sign the contract immediately. They should
have given notice of their interests but decided not to disclose it at the meeting, which
breached s191. If they had disclosed their material personal interests, their votes, and
attendance at the meeting regarding the Estate would have been affected or prohibited. By
which, the outcome of the contract might have been different.

Avoid Conflict of Interest and Misuse Position

A director has fiduciary duty of loyalty. There are two rules, no-conflict and no-profit, for
this duty.

No-conflict rule states that directors must not put themselves in a situation in which they are
tempted to prefer their own interests over those of the company. An objective test can be
conducted to see whether there is ‘a real sensible possibility of conflict’ and hence

9
Grand Enterprises Pty Ltd v Aurium Resources Limited [2009] FCA 513

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determining whether it breaches no-conflict rule. As in Boardman v Phipps10, a possibility of

conflict exists when “the reasonable man looking at the relevant facts and circumstances of
the particular case would think that there was a real sensible possibility of conflict”. The bank
lent an unsecured loan of $500,000 personally to Harry and Potter with the purpose of
influencing their decision making. Harry and Potter accepted the unsecured loan, they used
the estimates by the bank (which turned out to be false) to persuade shareholders to approve
the sale of the Estate. They did not disclose the unsecured loan they accepted to take a
decision at the meeting, leading to their votes being counted, which shows that they were
acting dishonestly. It resembles Boston Deep Sea Fishing v Ansell11 in which the director
accepted a bribe to take a particular course of action. The director received commission
bonuses from signing contracts to buy fishing vessels and ices with other companies. He did
not disclose his material personal interest but later was found out by the fishing company.
Moreover, if there had been no unsecured loan from the bank, Harry and Potter might have
not acted in the same way. The position of director which they were holding is the evidence
that they had skills and diligence. Assessing and examining carefully the estimates by the
bank is a necessary step. However, in reality, on behalf of company A, they immediately
agreed to sign a contract in which the Estate is sold to a new joint venture company in
exchange for 45% of capital and that company was later liquidated. As a reasonable man, it is
undeniable that Harry and Potter’s conduct has a real sensible possibility of conflict and
hence breaches no-conflict rule.

No-profit rule states that if a director profits from using company information or his or her
position, the director is accountable for those profits. It can be referred to Regal Hastings Ltd
v Gulliver12 for comparison. The former directors of Regal were sued against by the buyers
(i.e. new owners) of the business for breaching no-profit rule, claiming that the directors were
able to earn those profits from selling the business because their position was director. The
court concluded that without the position as a director, they would have not earned those
profits and ordered the profits to be returned to Regal. In the given case, Harry and Potter
were entitled to vote and be present at the meeting as they were executive directors. They had
certain impacts on and participated in the company’s decisions. They took those advantages
of their positions to attend and vote for the sale of the Estate in exchange for $500,000. Harry

10
Boardman v Phipps [1967] 2 A.C. 46
11
Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339
12
Regal (Hastings) Ltd v Gulliver [1942] UKHL 1

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and Potter financially benefited from the fact that they were directors, hence they must be
accountable for that $500,000. In conclusion, they breached no-profit rule.

Breaching either rule means the directors have breached fiduciary duty to avoid conflict of
interest. Fiduciary duty to avoid conflict of interest overlaps with s182(1) (duty not to misuse
position) in statutory law. Section 182(1) states that they must not improperly use their
position to either gain an advantage for themselves or cause detriment to the company. Harry
and Potter used their position as a director to approve the sale of the Estate to the new joint
venture company to gain an advantage of $500,000 for themselves. Moreover, the joint
venture company in which company A held 45% of the capital was later liquidated, causing
damages to company A. Hence, Harry and Potter also breached s182(1).

Due Care And Diligence

Section 180(1) states a director or other officer of a corporation must exercise their powers
and discharge their duties with the degree of care and diligence that a reasonable person
would exercise if they were a director or officer of a corporation in the corporation’s
circumstances; and occupied the office held by, and had the same responsibilities within the
corporation as the director or officer.

Applying the legal test to determine whether two directors are liable for negligence. About
the objective element, it is unlikely that reasonable directors in Harry and Potter’
circumstances would make the same decisions as they did. In the case Daniels v Anderson13
where the court held AWA’s executive directors were negligent for the loss of the company
since they did not take reasonable steps to examine AWA’ financial report frequently,
resulting in a huge loss caused by the auditor. Similarly, both Harry and Potter were well-
qualified enough to conduct more research for the estimation of property value instead of
only sticking to the bank’ advice which led to an extreme financial loss for the company. This
implies they did not take responsibility for their qualification to manage the company
effectively (“Responsibilities” in subjective element). Besides, it was unnecessary to sell the
Estate since company A’s circumstance was not in the urgent need of capital. Consequently,
both directors were negligent and breached s180(1) for not exercising reasonable care and

13
Daniels v Anderson (1995) 37 NSWLR 438

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skills towards the best interest of the company as well as failing to disclose the company’
circumstance when selling the property.

In conclusion, both breached overlap fiduciary duty under statutory law includes s181(1)(a),
s181(b), s182(1), s191(1) that put their company in a disadvantaged position. Specifically,
they failed to act in the best interest to bring benefits to the company and exercise proper
purpose by receiving the unsecured loan to enter the agreement to sell the property. Besides,
they did not show enough care and diligence regarding the best interest of the company under
s180(1). Hence, the company can apply several remedies to remunerate their loss such as an
injunction, which prevents them from participating in particular conduct under s1324.14
Furthermore, civil penalties can be imposed on them for their violation which require them to
pay a pecuniary penalty up to $200,000 (s1317G);15 compensate for the loss suffered
(s1317H)16 and be disqualified from management (s206C).17

2. Bindy

The legal issue is whether ASIC and company A can sue Bindy – an executive director, also
the business companion of Harry for breaching fiduciary duty to show enough care and
diligence under s180(1) of Act when he did not recheck what Harry and Potter had done.

Under s180(1), executive directors are required to take reasonable steps and show their
responsibility to guide and monitor the business management. Considering the case Daniels v
Anderson (cited above), where AWA’s executive directors were negligent for their
responsibility. Similar to the directors of AWA, Bindy is expected to fulfil his role which is
to show reasonable care and diligence as an executive director. However, he failed to do so
since he just followed what had been done by Harry without carefully verifying the
agreement with the joint venture to sell the Estate. Instead, he should have rechecked if there
was any detriment when Harry and Potter decided to sell the Estate and followed the Bank’s
suggestions. Then he should be able to prevent the company from unfavourable financial
situations. As a result, Bindy’ conduct partly contributed to the financial loss of the company
when he did not show enough care and diligence to the company management.

14
Corporations Act 2001, section 1324
15
Corporations Act 2001, section 1317G
16
Corporations Act 2001, section 1317H
17
Corporations Act 2001, section 206C

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Therefore, company A can successfully sue Bindy for breaching fiduciary duty under s180
since Bindy did not take any action to verify the agreement with the joint venture leading to
the financial detriment for the company, company A can apply for the remedy of
compensation. Also, civil penalties under s1317E18 can be imposed on him due to his conduct
as contravention of duty of care and diligence. Besides, he is required to pay a pecuniary
penalty of up to $200,000 under s1317G for contributing to the company’s disadvantaged
situation and is disqualified from management (s206C).

3. Andy

The legal issue is whether the company A can sue Andy, its non-executive director, for
breaching common law duty of care, skill and diligence and corresponding statutory duty
under s180(1) and s182(1) for misusing his position when not using his property qualification
to evaluate the highest value of the Estate by being absent at the meeting to join golf
tournament.

To fulfil the fiduciary duty of care and diligence, the director must take reasonable steps and
show their responsibility in monitoring and managing the company. Applying the legal test,
Andy just attended the Board meeting when the time was not in conflict with his golf
schedule for 5-year which shows that he performed less care to the company A’s affair than
his interest. It can be re-examined in the picture of Daniels v Anderson (cited above), where
the court emphasized that directors must take reasonable steps to put themselves in the role of
instructing and managing the company. Moreover, under section 182(1), his conduct was
supposed to be an improper use of position since he took advantage of his director’s power to
play golf instead of joining the company’s affair. Hence, his misuse of position to benefit his
interest instead of the company. Additionally, Andy is an expert in property development, but
he did not give any advice to examine the value of property to the other directors, which is
the careless act.

In conclusion, company A can sue Andy for breaching s180(1) and s182(1) by indirectly
contributing to the deteriorated financial situation. Civil penalties under s1317E should be
applied by the court for lack of care and diligence when he does not attend the company’s

18
Corporations Act 2001, section 1317E

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meeting to advise the Board as an expert in property development. Besides, it is reasonable

that the court can impose the remedy to disqualify him under s206C and pay a pecuniary
penalty for breaching fiduciary duty and s182(1) due to his improper use of position to play
golf rather than engaging in company activities.

4. Mandy

The legal issue is whether company A can sue Mandy-executive director for breaching
fiduciary duty to exercise power for proper purpose and corresponding to statutory duty
under s181(1)(b) when issuing shares to take control of the company.

Applying the legal test that whether the directors had improper conduct to benefit their own
or any external parties’ interests over the company. In this case, Mandy uses her power to
take control of the company that she intended to make an offer for all shares in company A at
$10 per share to cause company A to sell the Estate without further delay, which is her
interest. The situation can be considered as destroying the voting power of other majority
members of company A. In other words; it was supposed that Many took advantage of her
power to offer a low share price to force investors to exit the company. According to the case
of Whitehouse v Carlton,19 where the conduct of the husband when he issued ordinary shares
to eliminate the voting power of majority shareholders or create a new majority shareholder
was held to have an improper purpose. Therefore, the offering of low share price to take
control of the company of Mandy was not a proper purpose.

Therefore, Mandy breached s181(1)(b) due to improper purpose to use her power as an
executive director to take control of the company and sell the property without
procrastination. Thus, the company can apply s206C to eliminate her from the company’s
management since her conduct would make a ‘quick-killing’ for the company.

19
Whitehouse v Carlton (1987) HC Aust

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BIBLIOGRAPHY:

A. Case

ASIC v Adler & Ors [2002] NSWSC 171

Boardman v Phipps [1967] 2 A.C. 46

Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339

Daniels v Anderson (1995) 37 NSWLR 438

Grand Enterprises Pty Ltd v Aurium Resources Limited [2009] FCA 513

Parke v Daily News Ltd (1962) Ch 927

Regal (Hastings) Ltd v Gulliver [1942] UKHL 1

The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239

Whitehouse v Carlton (1987) HC Aust

B. Legislation

Corporations Act 2001, section 181(1)(a)

Corporations Act 2001, section 181(1)(b)

Corporations Act 2001, section 182(1)

Corporations Act 2001, section 191(1)

Corporations Act 2001, section 180(1)

Corporations Act 2001, section 1324

Corporations Act 2001, section 1317G

Corporations Act 2001, section 1317H

Corporations Act 2001, section 1317E

Corporations Act 2001, section 206C

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